The effect of the Taxation Laws
Amendment Act 25 of 2016 on
retirement planning
Mini-dissertation submitted in partial fulfilment of the
requirements for the degree
Magister Legum
in Estate Law at
the Potchefstroom Campus of the North-West University
ByA van den Berg
20259611
Supervisor:
A Vorster
i
SUMMARY
When the tax treatment of pension and provident funds before and after the implementation of the Taxation Laws Amendment Act 25 of 2016 is compared, the positive effect of this Act on retirement planning becomes clear. The alignment of the tax treatment of pension and provident funds, tax incentives for employers and employees and tax-free investments, is for the best and it will motivate South Africans to save for their retirement, which will lead to fewer vulnerable households.
The big question is whether the alignment of the tax treatment of pension and provident funds, tax incentives for employers and employees and tax-free investments are sufficient to increase the percentage of individuals who can retire comfortably.
The fund management issues that the members of retirement funds experience, namely inadequate communication with and from funds, is the thorn in the flesh that prevents the Taxation Laws Amendment Act 25 of 2016 from being a success.
The trustees of retirement funds will only be fulfilling their fiduciary duties as delineated in article 7 of the Pension Fund Act 24 of 1956, if they protect the interests of the members of retirement funds by ensuring that adequate and suitable information on members’ rights, benefits and duties in terms of the rules of the funds are communicated to the members and the beneficiaries. Even though the Council on Financial Services has sent out numerous Pension Fund Circulars that specifically deal with communication requirements, these circulars are not law and they cannot be enforced.
If a member of a pension fund does not receive adequate information from his or her fund, the person’s only remedy is to lay a complaint with the Office of the Pension Funds Adjudicator. A discussion of several rulings of the Office of the Pension Funds Adjudicator makes it clear that funds are only given a slap on the wrist if they fail to provide their members with benefit statements.
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The study makes several recommendations about how the Council of Financial Services and the Office of the Pension Funds Adjudicator can go about ensuring a better communication system or structure between retirement funds and its members.
If retirement funds inform their members properly on the value of their benefits and how their retirement funds or lump sum are calculated and taxed, they will be informed about what their benefits are at any point and how much they still need to save to retire independently. Members will be able to do proper retirement planning, a right to which all hard-working South Africans are certainly entitled.
Keywords:
Retirement planning / Taxation Laws Amendment Act / Pension Funds Act / tax / pension contributions / lump sum / reform retirement / national treasury / benefits statements / pension benefits / retirement fund / provident fund / fund administration / communication / fiduciary duties / trustees / tax incentives / employer / employee
iii
OPSOMMING
Wanneer die belastinghantering van pensioen- en voorsorgfondse voor en na die implementering van die Wysigingswet op Belastingwette 25 van 2016 met mekaar vergelyk word, word die positiewe uitwerking van die Wet op aftreebeplanning duidelik sigbaar. Die belyning van die belastinghantering van pensioen- en voorsorgfondse, belastingaansporings vir werkgewers en werknemers en belastingvrye beleggings is vir die beste en sal Suid-Afrikaners motiveer om meer vir hulle aftrede te spaar, wat uiteindelik sal lei tot minder kwesbare huishoudings.
Die groot vraag is egter of die belyning van die belastinghantering van pensioen- en voorsorgfondse, belastingaansporings vir werkgewers en werknemers en belastingvrye beleggings voldoende maatreëls sal wees om die persentasie van individue wat gemaklik kan aftree, sal verhoog.
Die fondsbestuurskwessies wat lede van aftree fondse ervaar, naamlik 'n gebrek aan kommunikasie tussen hulleself en die fondse, is die klippie in die skoen wat verhinder dat die implementering van die Wysigingswet op Belastingwette 25 van 2016 ʼn sukses kan wees.
Trustees van aftreefondse sal slegs aan hulle fidusiêre pligte, soos uiteengesit in artikel 7 van die Wet op Pensioenfondse 24 van 1956, voldoen indien hulle die lede van aftreefondse se belange beskerm en verseker dat voldoende en toepaslike inligting rakende hulle regte, voordele en pligte ingevolge die reëls van die fonds aan die lede en begunstigdes van die fonds gekommunikeer word. Selfs al het die Raad op Finansiële Dienste verskeie Pensioenfonds Omsendbriewe uitgereik wat spesifiek handel oor kommunikasie vereistes, is hierdie omsendbriewe nie wet nie en het dit geen afdwingbare effek nie.
Indien ʼn lid van ʼn pensioenfonds nie voldoende inligting vanaf sy of haar fonds ontvang nie, is sy of haar enigste remedie om 'n formele klag by die Kantoor van die Pensioenfondsberegter in te dien. ʼn Bespreking van verskeie beslissings van die Kantoor van die Pensioenfondsberegter maak dit duidelik dat fondse net oor die
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vingers geraps word wanneer die fonds versuim om sy lede van voordelestate te voorsien.
Verskeie aanbevelings word gemaak oor hoe die Raad van Finansiële Dienste en die Kantoor van die Pensioenfondsberegter te werk kan gaan om 'n beter kommunikasiesisteem of struktuur tussen aftreefondse en sy lede te verseker.
Indien aftreefondse hulle lede behoorlik inlig oor die waarde van hulle voordele en hoe bydraes tot hulle aftree fondse of enkelbedrae bereken en belas word, sal lede ingelig wees oor wat hulle voordele op enige gegewe stadium is en wat hulle nog nodig het om te spaar om onafhanklik af te tree. Lede sal in staat wees om behoorlike aftreebeplanning te doen, 'n reg waarop alle hard werkende Suid-Afrikaners sekerlik geregtig is.
Kernwoorde:
Aftreebeplanning / Wysigingswet op Belastingwette / Wet op Pensioen Fondse / belasting / pensioenbydraes / lomp som / aftreehervorming / nasionale tesourie / voordelestate / pensioenvoordele / aftreefondse / pensioenfonds / voorsieningsfonds / fondsadministrasie / kommunikasie / fidusiêre verpligtinge / trustees / belastingaansporings / werkgewer / werknemer
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TABLE OF CONTENTS
SUMMARY ... I OPSOMMING ... II LIST OF ABBREVIATIONS ... VIII
1 INTRODUCTION AND PROBLEM STATEMENT ... 1
2 OVERVIEW OF TAXATION OF PENSION AND PROVIDENT FUNDS ... 5
2.1 Introduction ...5
2.2 Background ...5
2.3 Taxation of fund benefits before 1 March 2016 ...8
2.4 Pension fund ... 10
2.4.1 The taxation of employer contributions (pension fund) ... 11
2.4.2 The taxation of employee contributions (pension fund) ... 12
2.4.3 Prior to retirement ... 13
2.4.4 Retirement and death ... 15
2.4.5 Retirement and death (pension fund) ... 16
2.5 Provident funds ... 17
2.5.1 The taxation on employer contributions (provident fund) ... 18
2.5.2 The taxation on member contributions (provident fund) ... 18
2.5.3 Prior to retirement (provident fund) ... 18
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2.6 Taxation of benefits after 1 March 2016 ... 19
2.6.1 New taxation rules for pension and provident funds ... 21
2.6.1.1 Taxation of employer contributions ... 21
2.6.1.2 Taxation of member contributions (pension and provident fund) 22 2.6.1.3 Annuitisation of provident fund benefits ... 23
3 FUND GOVERNANCE ISSUES AFFECTING THE EFFECTIVENESS OF RETIREMENT INITIATIVES ... 25
3.1 Introduction ... 25
3.2 Fund governance ... 29
3.3 Communication between funds and its members ... 31
3.4 Remedies available to fund members ... 39
4 RECOMMENDATIONS ... 43
5 CONCLUSION ... 48
vii
LIST OF TABLES
Table 1 13
viii
LIST OF ABBREVIATIONS
JEF Journal of Economic and Financial Sciences
MONEYM MoneyMarketing
RLB Retirement Lump Sum Benefit
RLWB Retirement Lump Sum Withdrawal Benefit
SARS Commissioner for the South African Revenue Services FSB Financial Services Board
PELJ Potchefstroom Electronic Law Journal
PUBLIC ADM. Journal of Public Administration and Policy Research
1
1 Introduction and problem statement
According to the Department of National Treasury,1 only approximately 10% of
working South Africans can maintain their standard of living after retirement.2 Reasons
for this include that South Africans do not preserve their pension savings3 and are not
educated enough on pension savings.4 The outcome of this environment is that fund
members do not know how contributions to their retirement funds are calculated, taxed,5 or what their benefits are in the event of death, early withdrawal, disability or
retirement.6 This leads to poor retirement planning.
National Treasury has been compelled to commence with the retirement reform process in 2012.7 One of the biggest aims of retirement reform is to create tax
incentives for members of retirement funds in the hope that people would be encouraged to save more8 and become less dependent on the State and/or family
members upon retirement. If National Treasury succeeds in its efforts, it can help to reduce financial vulnerability of households and get people in the habit of saving for their retirement.9 They further aimed to simplify the taxation of retirement
contributions10 by introducing the same tax treatment not only for retirement
contributions, but also on the withdrawal of lump sums from the member’s benefits.11
1 Herein after referred to as National Treasury. 2 De Beer 2014 JEF 185.
3 Du Preez 2014 http://www.fin24.com/Savings/Tools/8-points-to-clarify-retirement reform. 4 Caims 2015 Moneyweb 9.
5 Anon 2014 http://finweek.com/2014/10/09/retirement-retirees-come-short/. 6 Anon 2015 http://www.fanews.co.za/article/compliance-regulatory/2.
7 Department of National Treasury 2015
http://www.treasury.gov.za/publications/RetirementReform.
8 Rossouw 2016 MoneyM 21; Department of National Treasury 2012 http://www.treasury.gov.za/comm_media/press/2012/Incentivising.
9 Department of National Treasury 2012
http://www.treasury.gov.za/comm_media/press/2012/Incentivising.
10 Lamprecht 2016 Tax Breaks Newsletters 4; Department of National Treasury 2015 http://www.treasury.gov.za/comm_media/press/2015.
2
The new Taxation Laws Amendment Act12 was introduced, containing the new
retirement fund rules that had come into effect on 1 March 2016.13
The most common retirement funds are pension, provident and retirement annuity funds.14 To date, all three of the mentioned funds have functioned under their own
set of rules, terms and conditions.15 These funds have also been treated differently
for tax purposes.16
National Treasury made a real effort and as of 1 March 2016 the tax treatment of the different funds have been aligned in certain ways.17
However, the pebble in the shoe is the current retirement funds and their lack of communication with members.18 Currently, all complaints relating to pension and
provident funds are referred to the Office of the Pension Funds Adjudicator (hereinafter referred to as Funds Adjudicator).19 Fifty-seven per cent of all complaints
received are that members are unhappy about the ultimate benefit that they received from their pension or provident fund.20 These complaints occur because of poor
communication between the fund managers and fund members.21 What National
Treasury fails to keep in mind is that tax incentives and planning is useless if it is not
12 Taxation Laws Amendment Act 25 of 2016 (hereinafter referred to as the Taxation Laws Amendment Act).
13 Kamdar 2016 Tax Professional 17; Anon 2015 MoneyM 5.
14 S1 of the Income Tax Act 52 of 1962 (herein after referred to as the Income Tax Act); Schoeman and Nhabinde 2009 J. Public Adm. Policy Res. 1082.
15 S1 of the Income Tax Act; Botha et al The South African Financial Planning Handbook 880-883. 16 S1 of the Income Tax Act; Botha et al The South African Financial Planning Handbook 879. This
study focuses on retirement funds where there are an employer–employee relationship and does not elaborate on individual retirement platforms.
17 National Treasury 2016 Moneyweb 6.
18 Nevondwe and Ramatji 2014 J. Public Adm. Policy Res. 278. 19 Botha et al The South African Financial Planning Handbook 933.
20 Anon 2014 http://finweek.com/2014/10/09/retirement-retirees-come-short/. 21 Anon 2014 http://finweek.com/2014/10/09/retirement-retirees-come-short/.
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incorporated in retirement planning, “planning” that can only be done with all relevant information at hand.
Section 7 of the Pension Funds Act 22 stipulates the duties of trustees of retirement
funds, specifically their duty to provide adequate and appropriate information to the members regarding their rights, duties and benefits.23 Even though the Pension Funds
Act is law, retirement funds do not adhere to these provisions.24
The aim of this research is to analyse if the alignment of tax treatment and tax incentives alone will be sufficient to meet National Treasury’s aims, and secondly, how the lack in communication between funds and their members, which is preventing effective retirement planning, can be addressed.
Chapter 2 will give a brief overview of the basic pension and provident fund principles. Thereafter the tax implications on both of these funds before the implementation of the Taxations Laws Amendment Act are summarised and then the aligned taxation rules of pension and provident fund after 1 March 2016 are discussed.
Chapter 3 explains the fund governance issues, the pebble in the shoe – a lack of communication between funds and their members that is clearly exposed in relevant case law.
Chapter 4 emphasises that the aims of National Treasury to improve the process of retirement reform is irrelevant if the standards of fund governance and protection of members’ interest are not met. The chapter seeks to offer recommendations to address the problem.
22 Pension Funds Act 24 of 1956 (hereinafter referred to as the Pension Funds Act).
23 S7D of the Pension Funds Act; Botha et al The South African Financial Planning Handbook 897. 24 See Chapter 3 below.
4
The final chapter concludes by presenting the findings and explains that the good intentions of National Treasury will be worthless and ineffective without implementing a proper strategy to better communication between funds and their members.
5
2 Overview of taxation of pension and provident funds
2.1 Introduction
One of the main objectives of this study is to have a closer look at pension and provident funds and further retirement planning. It is important first to take a brief overview of these funds before turning to the taxation of pension and provident funds, before and after the implementation of the Taxation Laws Amendment Act.
2.2 Background
In South Africa, prior to the 18th and 19th century, it was accepted that employers had
a moral obligation to look after their employees financially once they had reached an age where they cannot work anymore25 due to ill health or old age.26 The employer’s
moral obligation compelled them to provide monies from their own funds to maintain a retired employee.27 This benefit was usually only granted to employees who reached
retirement age while in employment of the employer.28
Sadly, with the passing of time, employers began to focus more and more on the productivity and success of their businesses and became more reluctant to support employees who no longer contribute to their business.29 It became clear to employers
that a system had to be implemented that would allow for the pre-funding of retirement benefits that an employee receives at the end of his career.30 The first
25 Reddy What do individuals think about compulsory preservation funding? 14; Bekker 2003 An assessment: Defined contribution funds and retirement 2.
26 George 2006 Analysis of the South African pension fund conversions: 1980-2006; developing a model for dealing with environmental changes 3.
27 Bekker 2003 An assessment: Defined contribution funds and retirement 2.
28 Hunter “Legislative changes that should be made in order to more properly reflect the pension promise that an employer makes to its employees and to better protect retirement savings” 6. 29 Reddy What do individuals think about compulsory preservation funding? 14.
6
record that could be found of pension provision in South Africa dates back to 1937 when the British started paying pensions to their military staff.31
Prior to the Pension Funds Act, which was promulgated in 1956,32 funds were
administered in terms of the common law.33 With the implementation of the said Act,
government aimed to supervise retirement funds to insure that an employee who contributed during his career, would receive his benefits at retirement.34
The Pension Funds Act defines a “pension fund” as:
1) any association of persons established with the object of providing annuities or lump sum payments for members or former members of such association upon their reaching retirement dates, or for the dependants of such members or former members upon the death of such members; or
2) any business carried on under a scheme or arrangement established with the object of providing annuities or lump sum payments for persons who belong or belonged to the class of persons for whose benefit that scheme or arrangement has been established, when they reach their retirement dates or for dependants of such persons upon the death of those persons;
3) any association of persons or business carried on under a scheme or arrangement established with the object or receiving, administering, investing and paying benefits that became payable in terms of the employment of a member on behalf of beneficiaries, payable on the death of more than one member of one or more pension funds…35
This definition includes three types of retirement funds, one of which is an occupational scheme. Occupational schemes are funds that are established by an employer for the benefit of his employees, such as a pension or provident fund. For an occupational scheme to be valid there must be an employer–employee relationship
31 George 2006 Analysis of the South African pension fund conversions: 1980-2006: developing a model for dealing with environmental changes 3.
32 Dennis 2013 Section 37C of the Pensions Funds Act, 37 of 1956: A social security measure to escape destitution 1.
33 Reddy What do individuals think about compulsory preservation funding? 14. 34 Reddy What do individuals think about compulsory preservation funding? 14. 35 S1 of the Pension Funds Act.
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and membership to the fund is a condition of employment for all persons who fall within the group of people for whom the fund was established.36
Occupational funds such as pension and provident funds are not only for the benefit of employees,37 but also for the benefit of the employer.38 Not only do the employees
(members of the fund) enjoy a tax benefit,39 but they also tend to stay employed with
an employer for longer if they know that adequate provision is made for their retirement.40 For the employer, these types of funds provide a tax benefit,41 but more
importantly, they offer employers stability in their businesses. Employees tend not to change jobs so often if they know provision is made for their retirement,42 which leads
to overall efficiency and performance of the employer’s business.43 Pension and
provident funds also relieve an employer of his moral duty to maintain and support an employee and his or her family after retirement or death.44
It should be noted that the Pension Funds Act includes both pension and provident funds under the definition, but does not differentiate these two funds.45 Therefore, the
Pension Funds Act is applicable to both funds.46
36 Botha et al The South African Financial Planning Handbook 876-885. 37 Anon 2015 MoneyM 19.
38 Botha et al The South African Financial Planning Handbook 880; Bekker 2003 An assessment: Defined contribution funds and retirement 3.
39 Botha et al The South African Financial Planning Handbook 880; Anon 2015 MoneyM 19. See parr 2.4.2 and 2.5.2 below.
40 Anon 2016 MoneyM 23; Botha et al The South African Financial Planning Handbook 880.
41 Botha et al The South African Financial Planning Handbook 880. See parr 2.4.1 and 2.5.1 below. 42 George 2006 Analysis of the South African pension fund conversions: 1980-2006; developing a
model for dealing with environmental changes 4. 43 Anon 2016 MoneyM 23.
44 George 2006 Analysis of the South African pension fund conversions: 1980-2006; Developing a model for dealing with environmental changes 2; Botha et al The South African Financial Planning Handbook 880.
45 Botha et al The South African Financial Planning Handbook 875. 46 Botha et al The South African Financial Planning Handbook 875.
8
Just to clarify, even though the Pension Funds Act does not differentiate between the funds, there are differences between these funds. The most substantial difference between the two funds is: on date of retirement, a pension fund provides a
maximum of one third cash payment to the member and with the other two thirds the member must buy an annuity, while a provident fund allows a hundred present cash
payment on retirement.47
It is, however, important to bear in mind that the contributions or withdrawals from these funds are taxed in different ways and this should be explained in brief, especially with reference to the position before and after the Taxation Laws Amendment Act.
2.3 Taxation of fund benefits before 1 March 2016
When a benefit becomes payable to a fund member, the member receives a lump sum. The lump sum that an employee receives from his retirement fund can be classified into two groups.48 These lump sums are classified on the events leading up
to the payment of the benefit.49 The first group is the retirement lump sum benefit
(hereinafter referred to as RLB). For example, when a member of a pension fund retires, the member is allowed to withdraw one third of his total benefit in cash, while he must buy an annuity with the remaining two thirds of the benefit50 to provide him
with regular pension payments.51 The third lump sum that he receives is a RLB.
47 National Treasury 2016 Moneyweb 6; George 2006 Analysis of the South African pension fund conversions: 1980-2006; Developing a model for dealing with environmental changes 2; Godden 2010 TAXtalk 24. This difference between pension and provident funds may soon be one of the past, since National Treasury aims to amend the rules regarding the annuitisation of provident fund benefits. The proposed changes have not yet been approved, but are being negotiated. 48 Stiglingh et al Silke: South African Income Tax 402.
49 Stiglingh et al Silke: South African Income Tax 402.
50 George 2006 Analysis of the South African pension fund conversions: 1980-2006; Developing a model for dealing with environmental changes 2.
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The second group of lump sum benefit is the retirement lump sum withdrawal benefit (herein after referred to as the RLWB).52 These types of lump sums are paid out to
the member before retirement.
As soon as a member receives a lump sum (either RLB or RLWB), it becomes taxable.53
The Income Tax Act54 contains the law related to the taxation of a taxpayer’s income.55
The term taxable income is defined in Section 1 of the Income Tax Act as income less deductions allowed by the Act, plus any amounts included or deemed to be included in taxable income by the Act. Income is defined as “gross income” less amounts exempt from the Income Tax Act.56
Gross income is defined by the Income Tax Act as:
Gross income, in relation to any year or period of assessment, means –
1) in the case of any resident, the total amount, in cash or otherwise, received by or accrued to or in favour of such resident; or
2) in the case of any person other than a resident, the total amount, in cash or otherwise received by or accrued to or in favour of such person from a source within or deemed to be within the Republic,
3) during such year or period of assessment, excluding receipts or accruals of a capital nature, but including, without limiting the scope of this definition, such amounts (whether of a capital nature or not) so received or accrued as are described hereunder…57
Even though section 37A(1) of the Pension Funds Act prohibits the alienation of pension benefits in any form, section 37D(1)(a) of the Income Tax Act provides that
52 Stiglingh et al Silke: South African Income Tax 402.
53 Botha et al The South African Financial Planning Handbook 940.
54 Income Tax Act 52 of 1962 (herein after referred to as the Income Tax Act).
55 Van Rensburg 2014 An overview of taxation in the South African retirement funding industry 11. 56 S1 of the Income Tax Act.
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a pension fund may be deducted from a member’s benefit, any amount due by the member in terms of the Income Tax Act.58
The amount of tax that the member would be liable for depends on whether the member received a RLB or a RLWB.59 After a member receives his lump sum, whether
it is a RLB or RLWB, certain deductions are afforded to him in terms of the fifth and six schedule of the Income Tax Act.60
A short overview of the two funds and their current taxation rules now follows. The pension fund is discussed first, and thereafter the provident fund.
2.4 Pension fund
A pension fund is established by an employer for the benefit of his employees61 and
as previously mentioned, the main objective of this fund is to provide its members with a regular income after retirement62 or to provide a deceased member’s
dependants or nominees with benefits.63 Members of a pension fund may also
contribute to the fund, but in most instances, the employer is the main contributor.64
Members and employers contribute to the fund until the member withdraws his
58 The Pension Funds Act does not differentiate between pension and provident funds, but includes both under the definition of a pension fund organisation. Therefore, the Pension Funds Act, including S37A, is applicable to provident funds and pension funds.
59 Botha et al The South African Financial Planning Handbook 940. 60 Botha et al The South African Financial Planning Handbook 940.
61 S1 of the Income Tax Act; Botha et al The South African Financial Planning Handbook 882; Godden 2010 TAXtalk 24.
62 Anon Date unknown https://www.10x.co.za/corporate/corporate-investors/starting-a- retirement-fund/product-pension-fund-or-provident-fund/.
63 Van Rensburg 2014 An overview of taxation in the South African retirement funding industry 16. 64 Godden 2010 TAXtalk 24.
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pension benefit or retires.65 These contributions are invested and then used to pay the
costs of running the fund and to pay out the benefit of the member.66
The contributions made by the employer and or employee are usually calculated as a percentage of the member’s salary.67 As the member’s salary increases, contributions
to the fund increases accordingly.68
Pension fund members are only allowed to withdraw one third of their retirement savings as a lump sum on retirement.69 The other two thirds must buy an annuity.70
The taxation law prior to 1 March 2016 is now discussed. 2.4.1 The taxation of employer contributions (pension fund)
Section 11 of the Income Tax Act contains a list of all the allowable deductions in determining the taxable income of a taxpayer (employer). Section 11(I) allows an
employer who contributes to an employee’s pension fund to claim a deduction of his contributions up to 20% of the employee’s retirement funding income
against his taxable income.71
Payments that an employer makes to his employees in any other form than cash, is seen as a fringe benefit.72 The value of this “benefit” is then included in the employee’s
65 Godden 2010 TAXtalk 24.
66 The South African Labour Guide date unknown http://www.labourguide.co.za/general/499-pension-and-provident-funds.
67 Botha et al The South African Financial Planning Handbook 907. 68 Botha et al The South African Financial Planning Handbook 907. 69 Botha et al The South African Financial Planning Handbook 940. 70 Botha et al The South African Financial Planning Handbook 940.
71 Kokott The evaluation of different retirement investment options as savings and tax planning tools
32.
72 Ostler 2012 http://www.schoemanlaw.co.za/wp-content/uploads/2012/12/Fringe-Benefits-Article.pdf. An example of a fringe benefit is in the case where the employer pays the employee’s medical aid or part thereof.
12
gross income and he or she is taxed thereon.73 But, contributions to funds made by
employers, are be seen as a fringe benefit and they are not taxed in the hands of the employee.74
2.4.2 The taxation of employee contributions (pension fund)
The deductions that an employee may claim against his or her income are limited.75
More specifically, section 23(m) does not allow the deduction of any:
expenditure, loss or allowance, which relates to any employment of, or office held by, any person (other than an agent or representative whose remuneration is normally derived mainly in the form of commissions based on his or her sales or the turnover attributable to him or her) in respect of which he or she derives any remuneration, as defined in paragraph 1 of the Fourth Schedule of the Act..76
However, there is a specific exception that the contributions made by an employee to a pension fund may be deducted.77
Section 11(k) of the Income Tax Act stipulates that when a member contributes to a pension fund, his deduction is limited to the greater of R1 750.00 or 7.5% of his income from “retirement-funding income”. Retirement-funding income refers to:
…that part of the employee’s income that is taken into account in the determination of the contributions made by him/her or on his/her behalf to a pension or provident fund.78
73 Parr 2(a) and 5 of the 7th Schedule to the Income Tax Act; Ostler 2012 http://www.schoemanlaw.co.za/wp-content/uploads/2012/12/Fringe-Benefits-Article.pdf.
74 Par 2 of the 7th Schedule of the Income Tax Act. 75 S23 of the Income Tax Act.
76 S23(m) of the Income Tax Act.
77 See S23(m)(i-iii) of the Income Tax Act.
78 S11(k) of the Income Tax Act; Kokott The evaluation of different retirement investment options as savings and tax planning tools 34. However, any excess contributions (in excess of the section 11(k) deduction allowed) to a pension fund may not be carried forward to the following year of assessment. If there are any pension fund contributions of the member in arrears, the tax deduction available to the member is R1 800.00 per annum. Under these circumstances, any excess above R1 800.00 may be carried over to the next tax year.
13 2.4.3 Prior to retirement
A member of a pension fund may withdraw from his pension fund benefits prior to retirement.79 The lump sum that a member receives is referred to as a RLWB. When
an employee decides to partially withdraw from his pension fund benefits before retirement, the employee not only reduces his tax free lump sum that he would receive on date of retirement,80 but also becomes subject to a higher tax rate than usual on
date of retirement.81
The different RLWB are listed in paragraph 2(1)(b) of the second schedule of the Income Tax Act. Any one of the different RLWBs is included in a taxpayer’s gross income.82 The taxpayer is taxed on the full amount of the lump sum that he withdrew.83
Certain deductions are included in paragraph six of the second schedule to the Income Tax Act that may be deducted from a RLWB.84
After the relevant deductions had been deducted, the remainder is taxed according to that year’s RLWB table. During 2016, an employee’s RLWB would have been taxed as follows:85
79 Anon 2015 https://www.10x.co.za/publications/impact-of-the-retirement-reform-coming-into-effect-march-2016/.
80 Anon date unknown http://www.vanrooyenraath.co.za/financial-literacy/double-tax-liability-early-withdrawal-retirement-benefits.
81 Anon date unknown http://www.vanrooyenraath.co.za/financial-literacy/double-tax-liability-early-withdrawal-retirement-benefits.
82 Paragraph 2(1)(b) of the 2nd schedule to the Income Tax Act. 83 Botha et al The South African Financial Planning Handbook 943. 84 Botha et al The South African Financial Planning Handbook 943.
85 Anon 2015 http://www.sars.gov.za/Tax-Rates/Income-Tax/Pages/Retirement-Lump-Sum-Benefits.aspx.
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Table 1
Taxable income (R) Rate of tax (R)
0 - 25 000 0%
25 001 - 660 000 18% of the amount above 25 000
660 001 - 990 000 114 300 + 27% of the amount above 660 000 990 001 and above 203 400 + 36% of the amount above 990 000
Any lump sum a member receives is taxed in the year of assessment during which the lump sum benefit is deemed to have accrued.86 In terms of section 4(1) of the second
schedule to the Income Tax Act, it is deemed that a lump sum benefit accrued to a member on the:
1) Earliest date on which an election is made by the member and the benefit becomes recoverable because of the election;87
2) Earliest date on which an amount, in terms of section 37D(1)(a), (b) or (c) of the Pension Funds Act, is deducted from the benefit;88
3) Earliest date on which the benefit is transferred to another fund;89
4) On the member’s retirement;90 or
5) On the member’s death.91
86 Botha et al The South African Financial Planning Handbook 945. 87 Botha et al The South African Financial Planning Handbook 945. 88 Botha et al The South African Financial Planning Handbook 945. 89 Botha et al The South African Financial Planning Handbook 945. 90 Botha et al The South African Financial Planning Handbook 945. 91 Botha et al The South African Financial Planning Handbook 945.
15
It should be noted that when a RLWB is transferred to another fund it is deemed, in terms of section 4(1) of the second schedule to the Income Tax Act, that the benefit accrued to the member on the date of transfer.
2.4.4 Retirement and death
RLB refers to any amount that a person receives in the form of a lump sum after his retirement, death, the termination or loss of the taxpayer’s employment due to the employer ceasing to carry on with business or the taxpayer becoming redundant or the commutation of an annuity.92 Paragraph (e) of the definition of gross income in
Section 1 of the Income Tax Act includes a RLB in a taxpayer’s gross income.
After the relevant deductions had been deducted,93 the remainder of the lump sum is
taxed according to that year’s RLB table. It is important to note that an amount cannot be deducted twice and the deductions cannot exceed the lump sum received by the member.94 During 2016, an employee’s RLB would have been taxed as follows:95
Table 2
Taxable income (R) Rate of tax (R)
0 - 500 000 0%
500 001 - 700 000 18% of the amount above 500 000
700 001 - 1 050 000 36 000 + 27% of the amount above 700 000 1 050 001 and above 130 500 + 36% of the amount above 1 050
000
92 Botha et al The South African Financial Planning Handbook 946. 93 Par 6 of the 2nd schedule to the Income Tax Act.
94 Botha et al The South African Financial Planning Handbook 947.
95 Anon 2015 http://www.sars.gov.za/Tax-Rates/Income-Tax/Pages/Retirement-Lump-Sum-Benefits.aspx.
16
It is important to note that the tax-free amount of R500 000.00 is cumulative over the member’s entire lifetime.96
2.4.5 Retirement and death (pension fund)
Retire and retirement means to retire from employment and to become entitled to receive payment of an annuity.97
Upon retirement from a pension fund, the employee may withdraw a maximum one third of his benefits, which is payable as a cash lump sum and he must buy an annuity with the other two thirds of his benefit.98
After the relevant deductions were deducted, the remainder of the lump sum is taxed accordingly.
In the event of death, his entire pension fund benefit may be taken in the form of a lump sum99 and it must be deemed to have accrued to that person immediately before
96 Kokott The evaluation of different retirement investment options as savings and tax planning tools
34.
97 S1 of the Income Tax Act defines an retirement annuity as any fund (other than a pension fund, provident fund or benefit fund) which is approved by the Commissioner in respect of the year of assessment in question and, in the case of any such fund established on or after 1 July 1986, is registered under the provisions of the Pension Funds Act: Provided that the Commissioner may approve a fund subject to such limitations or conditions as he may determine, and shall not approve any fund in respect of any year of assessment unless he is in respect of that year of assessment satisfied that the fund is a permanent fund bona fide established for the sole purpose of providing life annuities for the members of the fund or annuities for the dependants or nominees of deceased members. The purpose of a retirement annuity is to provide the member with an income after retirement. There are mainly two options, namely a living annuity and a guaranteed annuity; Van Rensburg 2014 An overview of taxation in the South African retirement funding industry 27.
98 Botha et al The South African Financial Planning Handbook 940. In the event that an employee’s total pension fund benefit is not more than R75 000.00, the entire benefit may be taken as a lump sum.
99 Par 3 of the 2nd schedule to the Income Tax Act; Botha et al The South African Financial Planning Handbook 939.
17
his death. The benefit must therefore be taxed in the hands of the deceased member100
and therefore the lump sum is included in the gross income of his last assessment.101
2.5 Provident funds
A provident fund is also, like a pension fund, a fund that is established by an employer for the benefit of his employees.102 As previously mentioned, the main
objective of a provident fund is to provide its members with a cash lump sum at retirement date103 or to provide a cash lump sum to the family members of a deceased
member.104 The difference is that with a provident fund, the members have the option
to contribute to the fund themselves, but the employer must contribute to the fund.105
These contributions are invested and then used to pay the costs of running the fund and to pay benefits to its members.106
Once again, the contributions made by the employer and or employee are usually calculated as a percentage of the member’s salary.107 As the member’s salary
increases, contributions to the fund increases accordingly.108
100 Williams 2015 MoneyM 6; Botha et al The South African Financial Planning Handbook 949. 101 Stiglingh et al Silke: South African Income Tax 414.
102 S1 of the Income Tax Act; Botha et al The South African Financial Planning Handbook 882; Godden 2010 TAXtalk 24; Liberty Corporate date unknown http://www.libertycorporate.co.za/our-brochures/Documents/our-brochures/all-you-need-to-know.pdf.
103 S1 of the Income Tax Act; Botha et al The South African Financial Planning Handbook 882; Anon Date unknown https://www.10x.co.za/corporate/corporate-investors/starting-a-retirement-fund/product-pension-fund-or-provident-fund/.
104 S1 of the Income Tax Act; Botha et al The South African Financial Planning Handbook 882; Liberty Corporate date unknown http://www.libertycorporate.co.za/our-brochures/Documents/our-brochures/all-you-need-to-know.pdf.
105 Godden 2010 TAXtalk 24.
106 Godden 2010 TAXtalk 24; The South African Labour Guide date unknown http://www.labourguide.co.za/general/499 pension-and-provident-funds.
107 Botha et al The South African Financial Planning Handbook 907. 108 Botha et al The South African Financial Planning Handbook 907.
18
The difference is that the members of provident funds, on resignation or retirement, are allowed to withdraw their entire provident fund benefit as a lump sum109 and are
not limited to taking only one third of the total benefit as a cash lump sum and buying an annuity with the remaining two thirds of the benefit.
2.5.1 The taxation on employer contributions (provident fund)
The employer’s contributions to any provident fund are tax deductible for the employer.110 Section 11(I) allows an employer who contributes to an employee’s
provident fund to claim a deduction of his contributions of up to 20% of the employee’s retirement funding income against his taxable income.111 This is not be seen as a fringe
benefit that the employee enjoys and it is not taxed in the hands of the employee.112
2.5.2 The taxation on member contributions (provident fund)
Other than pension fund contributions, any contributions made by a member of a provident fund are paid from post-tax income and therefore the contributions are not tax deductible.113
2.5.3 Prior to retirement (provident fund)
Prior to retirement, the employee may withdraw his total benefits, which is payable as a cash lump sum.114
109 George 2006 Analysis of the South African pension fund conversions: 1980-2006; Developing a model for dealing with environmental changes 2.
110 S11 of the Income Tax Act; Godden 2010 TAXtalk 24.
111 Kokott The evaluation of different retirement investment options as savings and tax planning tools
32.
112 Par 2 of the 7th schedule to the Income Tax Act; Anon 2015 https://www.10x.co.za/publications/impact-of-the-retirement-reform-coming-into-effect-march-2016/.
113 Godden 2010 TAXtalk 25.
114 Botha et alThe South African Financial Planning Handbook 940. The cash lump sum will be taxed after all available deductions had been deducted, as per table 1 above.
19 2.5.4 Retirement and death (provident fund)
Upon retirement, the employee may withdraw his total benefits that are payable as a cash lump sum115 and after the relevant deductions had been deducted, the lump sum
is taxed accordingly.116
Should the member pass away, his entire benefit can be taken as a lump sum.117 The
lump sum benefit would be deemed to have accrued to the deceased member118 and
after the relevant deductions had been deducted,119 the remaining amount is included
in his gross income120 and taxed in accordance with Table 1 above.
The difference from the taxation of contributions of pension and provident funds prior to 1 March 2016, is that all employer contributions to pension and provident funds are not seen as a non-taxable fringe benefit. These contributions may be deducted, subject to limitations, as a business expense. Contributions made by employees to a pension fund are tax deductible, subject to limitations, for income tax purposes. Provident fund members are currently entitled to any deduction for income tax purposes on their contributions to the fund.
2.6 Taxation of benefits after 1 March 2016
The point of departure for this discussion is the Taxation Laws Amendment Act containing the new retirement fund rules that came into effect on 1 March 2016.121
115 Botha et al The South African Financial Planning Handbook 940.
116 The cash lump sum is taxed, after all available deductions had been deducted, as per Table 1 above.
117 Par 2(1)(a) of the 2nd Schedule to the Income Tax Act includes this lump sum benefit under par (e) of the definition of gross income.
118 Botha et al The South African Financial Planning Handbook 912. 119 Contained in Par 5 of the 2nd schedule to the Income Tax Act. 120 Stiglingh et al Silke: South African Income Tax 414.
121 National Treasury 2016 Moneyweb 6; Kamdar 2016 Tax Professional 17; Anon 2015
https://www.10x.co.za/publications/impact-of-the-retirement-reform-coming-into-effect-march-20
With the new retirement fund rules government aims to simplify the tax treatment of contributions to retirement funds122 by proposing that uniform tax rules apply to
retirement contributions of pension and provident funds123 and by creating tax
incentives for members in an attempt to get them to save more.124
Over and above the tax incentives on contributions to retirement funds, National Treasury also introduced a tax-free investment benefit125 in an attempt to encourage
households to save even more.126 An individual can contribute R30 000 per tax year127
to a tax-free investment. A lifetime limit of R500 000, however, applies.128 The funds
can be invested in interest-bearing accounts, such as equities or money market accounts.129 The major advantage for investors is the fact that all growth on the
investment is exempt from tax on the interest, dividends, capital gains or withdrawals from the tax-free savings account. 130
It is important to note with regard to the taxation rules of pension and provident fund, that they are aligned.131 The new taxation rules of both funds are now analysed
together.
2016/. There are, however, some retirement reform proposals that have been postponed until 2018 that are discussed below.
122 Pricewaterhouse 2016 Tax Alert 1; Department of National Treasury 2015 http://ww.treasury.gov.za/publications/RetirementReform.
123 Lamprecht 2016 Tax Breaks Newsletters 4; Department of National Treasury 2012 http://www.treasury.gov.za/publications/RetirementReform.
124 Rossouw 2016 MoneyM 21. 125 Van der Merwe 2015 MoneyM 14.
126 Hugo 2016 MoneyM 18; Anon 2015 MoneyM 24.
127 Hugo 2016 MoneyM 18; Van der Merwe MoneyM 14; Anon 2015 MoneyM 24; Department of National Treasury 2013 http://www.treasury.gov.za/documents/national.
128 Hugo 2016 MoneyM 18; Van der Merwe 2015 MoneyM 14; Department of National Treasury 2013 http://www.treasury.gov.za/documents/national%20budget/2013/2013%20Retirement%20Refor ms.pdf.
129 Anon 2015 MoneyM 24.
130 Hugo 2016 MoneyM 18; Van der Merwe 2015 MoneyM 14; Department of National Treasury 2013 http://www.treasury.gov.za/documents/national.
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2.6.1 New taxation rules for pension and provident funds
As from 1 March 2016, the new taxation rules apply to pension and provident funds.132
While pension fund members most likely would not feel the effect of retirement reform, provident fund members will be positively affected thereby.133
Government is aligning the taxation rules of pension and provident funds, which brings significant changes in the taxation of contributions to retirement funds and the withdrawal of benefits.
2.6.1.1 Taxation of employer contributions
After 1 March 2016,134 employer contributions to pension or provident funds in
respect of their employees are seen as a fringe benefit and it is taxed in the hands of the employee.135
All contributions made by employers are deemed as if the employees made such contributions.136 The contributions that the employer made to the fund are included in
the employee’s contributions when calculating the employee’s tax deduction.137 The
employee is able to claim a tax deduction on his personal contributions and on employer contributions138 as per paragraph 2.4.3 hereof.
132 National Treasury 2016 Moneyweb 6; Kamdar 2016 Tax Professional 17; Botha et al The South African Financial Planning Handbook 884; Par 2.4.1 above.
133 Department of National Treasury 2015 http://ww.treasury.gov.za/publications/RetirementReform. 134 Kamdar 2016 Tax Professional 17.
135 Botha et al The South African Financial Planning Handbook 884. See the previous explanation as discussed in par 4.2.2 above.
136 Botha et al The South African Financial Planning Handbook 884.
137 Anon 2015 https://www.ensafrica.com/news/tax-treatment-of-contributions-to-retirement-funds.
138 Ward date unknown
file:///C:/Users/Aletje/Downloads/Retirement%20Annuity%20reform%20July%202014%20(1)% 20(5).pdf.
22
As before, employers who contribute to an employee’s pension or provident fund is able to claim a deduction of his contributions up to 20% of the employee’s taxable income.139
2.6.1.2 Taxation of member contributions (pension and provident fund)
After 1 March 2016,140 all member contributions to pension or provident funds
are subject to the same taxation rules.141 Provident fund members, like pension fund
members, are allowed a tax deduction for their contributions to the fund.142 Not only
do pension and provident fund members enjoy the same tax deductions,143 but
provident fund members also see an increase in their net salary.144
Employer contributions, which are seen as a fringe benefit of the employee, are deemed a contribution made by the employee.145
Contributions and deemed contributions to a pension or provident fund are deductible from a member’s taxable income. The deduction is up to 27,5% of the higher of the member’s taxable income.146 The deduction that the employee can claim is limited to
a maximum of R350 000 per year.147 If a member contributed more than the maximum
139 Botha et al The South African Financial Planning Handbook 884.
140 National Treasury 2016 Moneyweb 6; Kamdar 2016 Tax Professional 17. 141 National Treasury 2016 Moneyweb 6.
142 Botha et al The South African Financial Planning Handbook 884; National Treasury 2016 Moneyweb
6; Department of National Treasury 2015
http://ww.treasury.gov.za/publications/RetirementReform.
143 National Treasury 2016 Moneyweb 6; Department of National Treasury 2015 http://ww.treasury.gov.za/publications/RetirementReform.
144 Kamdar 2016 Tax Professional 18; Department of National Treasury 2015 http://ww.treasury.gov.za/publications/RetirementReform; Anon MoneyM 5;
145 Pricewaterhouse 2016 Tax Alert 1; Kamdar 2016 Tax Professional 17; Anon MoneyM 5.
146 Botha et al The South African Financial Planning Handbook 884; Kamdar 2016 Tax Professional
17.
147 Botha et al The South African Financial Planning Handbook 884; Kamdar 2016 Tax Professional
23
deduction per annum, he not only enjoys a tax deduction on such amount, but is also allowed to carry such amount over to the next year of assessment.148
2.6.1.3 Annuitisation of provident fund benefits
The retirement reform proposes that on date of retirement, a provident fund member will, as with pension funds, be allowed to take one third of his total benefit in the form of a cash lump sum and be compelled to purchase an annuity with two thirds of his benefits,149 if the member’s total benefit exceeds R247 500.150 If the total benefit is
less than R247 500, the member will be allowed to take the total benefit as a cash lump sum.151
It must be noted that the annuitisation of provident fund benefits has been postponed until 1 March 2018.152
In the event that a member is under the age of 55 years old on 1 March 2018, their vested rights in the fund (contributions and the growth thereon made to the fund prior to 1 March 2018) will not be affected.153 This means that the member will be able to
withdraw his vested rights in the fund on date of retirement.154 Any contribution made
to the fund after 1 March 2018 will be subject to the new annuitisation rules and the member will enjoy the new tax deductions.155
148 Lamprecht 2016 Tax Breaks Newsletters 4.
149 Kamdar 2016 Tax Professional 17; Rossouw 2016 MoneyM 21; Botha et al The South African Financial Planning Handbook 884.
150 Kamdar 2016 Tax Professional 18; Department of National Treasury 2015 http://www.treasury.gov.za/publications/RetirementReform/20151124%20Annexure%20B%20I mpact%20of%20annuitisation.pdf.
151 Kamdar 2016 Tax Professional 17; Rossouw 2016 MoneyM 21; Pricewaterhouse Tax Alert 2. 152 Kamdar 2016 Tax Professional 18.
153 Acton 2016 Moneyweb 10; Pricewaterhouse 2016 Tax Alert 1. 154 Acton 2016 Moneyweb 10; Pricewaterhouse 2016 Tax Alert 1. 155 Clark 2013 Moneyweb 11; Kamdar 2016 Tax Professional 18.
24
All members who are 55 years old and older on 1 March 2018, will not be affected by the proposed legislation and will still be able to withdraw their full benefit as a cash lump sum, unless they transfer their benefits to another fund of which they become a member after 1 March 2018.156 These members will not only enjoy the benefits of the
new tax deductions,157 but will even be allowed to withdraw contributions made after
1 March 2018 as a cash lump sum.158
It must be noted the above proposed amendment has been delayed due to pushbacks from various unions159 and constitutionality concerns relating to the requirement that
provident fund members must buy an annuity.160
Therefore, by comparing the taxation of pension and provident fund contributions and benefits before and after the implementation of the Taxation Laws Amendment Act, it is evident that the said Act will certainly have a positive effect on South African’s retirement planning.
It is therefore evident that fund governance should also be considered.
156 Acton 2016 Moneyweb 10; Kamdar 2016 Tax Professional 18; Pricewaterhouse 2016 Tax Alert 1. 157 Clark 2013 Moneyweb 11.
158 Kamdar 2016 Tax Professional 18; Department of National Treasury 2015 http://www.treasury.gov.za/publications/RetirementReform.
159 Lamprecht 2016 Personal Finance Newsletter 16.
25
3 Fund governance issues affecting the effectiveness of retirement
initiatives 3.1 Introduction
Although National Treasury is working hard to empower people to save more for retirement by means of tax incentives, tax-free investments, law amendments and creating awareness of the importance of saving for retirement, fund governance
issues are a main concern, especially, the impact they have on the effectiveness of
retirement initiatives.
All complaints relating to pension and provident funds are referred to the Funds Adjudicator. The Pension Funds Act reads as follows:
1) Notwithstanding the rules of any fund, a complainant may lodge a written complaint with a fund for consideration by the board of the fund.
2) A complaint so lodged shall be properly considered and replied to in writing by the fund or the employer who participates in a fund within 30 days after the receipt thereof.
3) If the complainant is not satisfied with the reply contemplated in subsection (2), or if the fund or the employer who participates in a fund fails to reply within 30 days after the receipt of the complaint the complainant may lodge the complaint with the Adjudicator.
4) Subject to section 301, the Adjudicator may on good cause shown by any affected party-
a) extend a period specified in subsection (2) or (3) before or after expiry of that period; or
b) condone non-compliance with any time limit specified in subsection (2) or (3).161
26
The majority of complaints received by the Funds Adjudicator entail that members were unhappy about the ultimate benefit that they received from their pension or provident fund.162 Members complained that the funds they received are much less
than what was promised by their broker163 or product provider.164
The reason for these types of complaints may be poor communication between the trustees of the funds and their members.165 In light of these complaints, one can
perhaps conclude that members are not well informed regarding their benefits, contributions and the impact of death, disability, withdrawal of funds early or early retirement. This was evident in Slamat v The Private Security Sector Provident Fund and another 2013 2 BPLR 273 (PFA),166 which was heard before the Funds Adjudicator
during 2012. This case is a clear indication of member’s struggles to get information from their funds. In the Slamat-case, the fund member (complainant) was a member of a provident fund (respondent). The member complained to the Funds Adjudicator about the fund not providing him with a benefit statement, which complaint was received on 10 September 2009.167 On 18 September 2009 the Funds Adjudicator send
162 Anon 2014 http://finweek.com/2014/10/09/retirement-retirees-come-short/.
163 S1 of the Financial Advisory and Intermediary Services Act 37 of 2002 (hereinafter referred to as
FAIS) defines a financial services provider as any person, other than a representative, who as a regular feature of the business of such person furnishes advice or furnishes advice and renders any intermediary service or renders an intermediary service. S1 of FAIS also defines a representative as any person, including a person employed or mandated by such first-mentioned person, who renders a financial service to a client for or on behalf of a financial services provider, in terms of conditions of employment or any other mandate, but excludes a person rendering clerical, technical, administrative, legal, accounting or other service in a subsidiary or subordinate capacity, which service does not require judgment on the part of the latter person or does not lead a client to any specific transaction in respect of a financial product in response to general enquiries. A broker is usually a representative of a financial services provider.
164 Anon 2014 http://finweek.com/2014/10/09/retirement-retirees-come-short/.
165 Anon 2014 http://finweek.com/2014/10/09/retirement-retirees-come-short/. S1 of FAIS defines a product provider as any person who issues a financial product.
166 Slamat v Private Security Sector Provident Fund and another 2013 BPLR 273 (PFA) (hereinafter referred to as the Slamat-case).
27
a letter to the fund, informing them about the complaint and stipulating that the fund must respond on or before 28 October 2009.168
The fund was afforded the opportunity to comment on the complaint169 as prescribed
in the Pension Funds Act, which stipulates that:
When the Adjudicator intends to conduct an investigation into a complaint he or she shall afford the fund or person against whom the allegations contained in the complaint are made, the opportunity to comment on the allegations.170
The fund did not respond and the Funds Adjudicator had to make a decision based on the facts before them.171 The issue that had to be decided was whether or not the
fund failed to provide the member with a benefit statement.
The Funds Adjudicator turned to the duties of trustees of a provident fund, as contained in the Pension Funds Act.172 The Pension Funds Act contains the following
specific duty of trustees:
…ensure that adequate and appropriate information is communicated to the members and beneficiaries of the fund informing them of their rights, benefits and duties in terms of the rules of the fund, subject to such disclosure requirements as may be prescribed.173
The Funds Adjudicator held that funds communicates to its members by regularly providing them with benefit statements, giving the members information regarding their benefits, contributions and other information.174 The Funds Adjudicator made the
following comment regarding benefit statements:
168 Par 1.2 of the Slamat-case. 169 Par 4.1 of the Slamat-case. 170 S30F of the Pension Funds Act. 171 Par 1.2 of the Slamat-case. 172 S7 of the Pension Funds Act. 173 S7D(c) of the Pension Funds Act. 174 Par 5.3 of the Slamat-case.
28
… a benefit statement plays a very important role in the sense that it gives members vital information regarding their benefits in the event of death, withdrawal, disability, retirement and other relevant information relating to the fund’s assets.175
The Funds Adjudicator held that when funds provide benefit statements to its members on a regular basis, the fund is complying with its fiduciary duty as set out in section 7D(c) of the Pension Funds Act.
Ultimately, the Funds Adjudicator found that the fund did fail to provide the member with a benefit statement176 and made an order compelling the fund to provide the
member with a benefit statement within seven days.177
This was also the case in Linkie Tshwarano Mantsho v Managing Director of the Municipal Employees Pension Fund (MEPF)178 where the complainant was not provided
with benefit statements for years.179 After not receiving benefit statements since 2005,
the complainant lodged a complaint with the Funds Adjudicator during December 2013180 and requested the Funds Adjudicator to compel the fund to provide her with
benefit statements.181
After the Funds Adjudicator considered the complaint, the fund was ordered by the Funds Adjudicator to provide the benefit statements to the complainant,182 but still
failed to do so.183
175 Par 5.3 of the Slamat-case. 176 Par 5.6 of the Slamat-case. 177 Par 6.1.1 of the Slamat-case.
178 Linkie Tshwarano Mantsho v Managing Director of the Municipal Employees Pension Fund (MEPF) (case number 37226/2014) (hereinafter referred to as the Linkie-case).
179 Par 2 of the Linkie-case; Lukhaimane 2015 http://www.fanews.co.za/article/compliance-regulatory/2/Pension Funds Act-pension-fund-adjudicator/1026/judge-rules-Pension Funds Act-s-determinations-enforceable-as-a-judgement/18743.
180 Par 2 of the Linkie-case. 181 Par 3 of the Linkie-case. 182 Par 5 of the Linkie-case.
183 Lukhaimane 2015 http://www.fanews.co.za/article/compliance-regulatory/2/Pension Funds Act-pension-fund-adjudicator/1026/judge-rules-Pension Funds Act-s-determinations-enforceable-as-a-judgement/18743.
29
The complainant then approached the High Court of South Africa for an order holding the fund in contempt of a determination made by the Funds Adjudicator.184 The
complainant contended that the fund had disobeyed the Funds Adjudicator’s determination and that since the determination is “deemed to be a civil judgment by any court of law” as contained in section 30(O)(1) of the Pension Funds Act, the fund is in contempt of the court.185
The high court had to establish whether the Funds Adjudicator was in contempt of court.186 In order to do so, the high court had to determine whether the Funds
Adjudicator can be given the status of a court.187
The high court held that the Funds Adjudicator is established in terms of the provisions of the Pension Funds Act,188 it may follow any procedure which it considers appropriate
when investigating a complaint and no party is entitled to be legally represented.189
Therefore, the high court found that the Funds Adjudicator is not a public judicial officer and his determinations is not an order of the court and therefore cannot be in contempt of court.190
3.2 Fund governance
One of the main concerns is that members do not know that in terms of the fund rules, fund contributions are calculated as a percentage of their pensionable salary instead of their total earnings.191
184 Par 1 of the Linkie-case. 185 Par 6 of the Linkie-case. 186 Par 10 of the Linkie-case. 187 Par 10 of the Linkie-case. 188 Par 14 of the Linkie-case. 189 Par 16 of the Linkie-case. 190 Par 26 of the Linkie-case.
30
This is a very important definition as the term “pensionable salary” is usually contained in most employee’s contracts. Unfortunately, this goes completely unnoticed.192
Pensionable salary is defined by each fund’s rules.193 The definition of pensionable
salary may or may not take into account variable items such as commission, bonuses or overtime.194 For example, if a specific fund defines pensionable salary as a member’s
basic salary and that specific employee earns overtime as well, it is crucial that the member knows that the overtime will not be included in the calculation of his pensionable salary.195
The problem relating to pensionable salary can also be explained using another example. A member chooses to save 20% of his salary of R100 000 per month (R20 000). Without realizing, a pensionable salary clause is included in his contract stating that his employer has pensionable income set at 75% of the employer’s salary. This means that the employee will only save 20% of R75 000 (R15 000), meaning that the employee will save R5 000 less than what he had in mind. Without realizing, member’s contributions are much lower than what they may have expected.196
If members received their benefit statements and other relevant information on a regular basis, they may have noticed this, since the annual benefit statement must reflect the member’s pensionable salary,197 and made provision for bigger
contributions. One must also bear in mind that some employees do not understand these complex calculations.
192 Cabot-Alletzhauser 2014 http://benefitsbarometer.co.za/2014/06/26/unintended-consequenses-pensionable-pay/. 193 Mainwood 2013 https://www.barnett-waddingham.co.uk/comment-insight/briefings/2013/12/10/pensionable-salary-vs-final-pensionable-salary-vs-/. 194 Mainwood 2013 https://www.barnett-waddingham.co.uk/comment-insight/briefings/2013/12/10/pensionable-salary-vs-final-pensionable-salary-vs-/. 195 Mainwood 2013 https://www.barnett-waddingham.co.uk/comment-insight/briefings/2013/12/10/pensionable-salary-vs-final-pensionable-salary-vs-/. 196 Anon 2014 http://finweek.com/2014/10/09/retirement-retirees-come-short/. 197 Anon date unknown http://www.totrust.co.za/200602_libertylife.htm.
31
Because some funds do not provide their members with benefit statements, members cannot do proper retirement planning.198
3.3 Communication between funds and its members
Pension and provident funds management mainly communicate to their member’s through benefit statements, giving the members information regarding their benefits, contributions and other information.199 The frequency of funds providing benefit
statements to their member’s is usually contained in the fund rules.200 While some
retirement funds experience delays in the issuing of benefit statements,201 some
members do not receive their benefit statements at all.202 The most common reason
for this is that funds send the member’s benefit statements to the intermediary,203 who
then fails to distribute these statements to the members.204
One of the missions of the Financial Services Board (herein after referred to as the FSB) is to promote a safe and stable environment for members of Retirement Funds. In an attempt to accomplish their mission, the FSB issues information circulars
198 National Treasury cannot expect South Africans to provide sufficiently for their old age if they are not properly educated and informed about their benefits. The only way to ensure both is by constantly providing members with the correct benefit statements that reflect the accumulated benefits in a simple and concise manner.
199 Par 5.3 of the Slamat-case.
200 Par 5.4 of the Slamat-case. In the par 5.4 of the Slamat-case, the adjudicator held that if there is no clear provision in the fund’s rules regarding the frequency of providing benefit statements to its members, the provisions of the Pension Funds Circular 86 read together with the provisions of the Pension Funds Circular 90 are instructive.
201 Financial Services Board 2013
https://www.fsb.co.za/Departments/retirementFund/Documents/Registrar.
202 In the case of Rodseth v Dynamique SA Umbrella Provident Fundand another 2015 2 BPLR 263 (PA) the member of the fund never received a benefit statement because the fund sent the benefit statement to the intermediary, who failed to provide the member with same. The adjudicator held that "by forwarding benefit statements to the intermediary for onward transmission to the members, the board has abandoned its duty to ensure that adequate information is communicated to members".
203 A financial intermediary is an organization or individual that acts as middleman between parties in a financial transaction.
